Fitch Affirms American Express at 'A /F1'; Outlook Stable
AXP's rating review was conducted as part of Fitch's periodic peer review of U.S. consumer finance companies. For a summary of the outcomes and drivers of this peer review please see the release entitled 'Fitch Affirms Five U.S. Consumer Finance Companies Following Peer Review' dated April 8, 2015.
KEY RATING DRIVERS - IDRs, Subordinated Debt, Preferred Shares, Support Ratings, Support Rating Floors, VRs, Deposits
The rating affirmations reflect AXP's strong franchise, spend-centric business model, leading market position in the payments industry, peer-superior credit performance, consistent profitability, diverse funding base, ample liquidity, and strong risk-adjusted capitalization.
Rating constraints include AXP's concentrated and cyclical business model, potential funding sensitivity associated with wholesale and internet deposit funding sources, the likelihood of asset quality reversion from current levels.
The Stable Outlook reflects Fitch's view that AXP's favourable business model and strong competitive position afford it a degree of operational and financial flexibility to respond to recent challenges associated with AXP's loss of the Costco Wholesale Corporation (Costco, 'A+', Outlook Positive) relationship, and continued elevated regulatory, legislative and litigation risk.
Fitch expects AXP's operating performance to remain under a degree of pressure over the near term reflecting a number of headwinds including lackluster modest global economic growth, normalizing credit performance, the loss of the Costco relationship, a stronger U.S. dollar and continued heightened regulatory, legislative and litigation risk.
Despite these challenges, Fitch believes AXP's longer-term operating performance will remain strong supported by the company's favourable business model and competitive position, the continued shift in global payments away from cash and checks, an expanding Card Member base, and expense discipline. Fitch also expects the company to continue to innovate and invest in new opportunities that complement its existing competitive strengths.
Credit performance is expected to remain among the strongest of other top credit card issuers in 2015, although charge-offs and delinquencies will likely start to normalize. Fitch expects provision expenses to increase in 2015 driven primarily by portfolio seasoning and growth, as well as some modest deterioration in credit metrics. Net charge-offs on the lending portfolio improved 30 basis points (bps) to 1.5% in 2014 and remained well below other top credit card issuers and the industry average. Reserve coverage remained strong at 1.7% of loans and 167% of loans past due at Dec. 31, 2014.
The impact from rising interest rates is expected to be manageable for AXP. At Dec. 31, 2014, assuming an immediate 100 basis point increase in interest rates, AXP estimates that net interest income (NII) over the following 12-month period would decrease by approximately \$212 million. This estimated decline in NII primarily relates to non-interest bearing charge card receivables and fixed rate credit card loans that are funded with variable rate debt. As of Dec. 31, 2014, fixed rate worldwide charge card receivables and credit card loans accounted for approximately 67% of AXP's total portfolio.
Regulatory capital ratios improved further from already strong levels in 2014. The Tier I capital ratio increased 110 bps to 13.6% in 2014 and the Tier I common ratio grew 60 bps to 13.1% in 2014. Both metrics compare favorably to peer banks. Additionally, AXP performed very well relative to peers in the Federal Reserve's most recent Comprehensive Capital Analysis and Review (CCAR). As part of this review, AXP received a non-objection related to its capital plan submitted in January 2015. Fitch expects capital ratios to remain relatively stable as strong capital generation is offset by asset growth and return of capital to shareholders (e.g. dividends, stock repurchases).
AXP's liquidity profile remains a rating strength. AXP had \$15.2 billion (excluding CP and operating cash) of readily available cash and marketable securities at Dec. 31, 2014. This compared to \$13.4 billion of long-term debt and CD maturities over the next 12 months. Furthermore, the parent company has no unsecured debt maturities in 2015, which compares to cash and equivalents and investment securities of \$8.8 billion at year-end 2014.
On Feb. 12, 2015 AXP announced that it would not renew its U.S. co-brand relationship with Costco. AXP expects the loss of the Costco U.S. contract to have a negative impact on earnings and revenue growth after the contract expires in March 2016. However, the company reiterated its long-term earnings per share growth target of between 12% and 15% beginning in 2017.
Fitch believes AXP will pursue other investment opportunities including within consumer and small business payments, prepaid products, global network services (GNS) bank partnerships, and new co-brand relationships in an effort to offset the long-term loss of earnings from the Costco relationship. For example, on March 19, 2015 AXP announced a new exclusive multi-year partnership with Charles Schwab & Co., Inc. ('A', Outlook Stable) to create two new premium co-branded cards.
Fitch views AXP's decision not to renew such an important relationship as an understandable outcome when seeking to balance long term economic value and short-term results. Although near term earnings will be pressured, Fitch believes AXP's strong franchise, spend-centric business model and leading market position in the payments industry position it well to achieve its long term operating performance targets.
For a more in-depth review of the implications related to this announcement, please refer to Fitch's press release 'Loss of Co-Branding Relationship Adds to Near-Term Challenges Facing Amex' published on Feb. 17, 2015.
On Feb. 19, 2015, the United States District Court in the Eastern District of New York ruled in favor of the U.S. Justice Department (DOJ) in its anti-steering case against AXP. AXP has moved to bring its case to the appellate court and believes it will prevail on appeal.
Fitch believes losing the DOJ lawsuit (for now) is a credit negative and adds to AXP's near term challenges. That said, in a scenario where the ruling is upheld Fitch believes the longer term impact on AXP's business model and operating performance could be modest. While Fitch believes allowing merchant steering could negatively impact AXP's billed business volumes, it is unclear how many merchants would actually steer customers at the point of sale. In Fitch's opinion, merchants will need to prudently manage the trade-offs between customer satisfaction, sales volume and transaction pricing when making the decision to steer customers to lower cost forms of payment. That said, if merchant steering becomes widespread, Fitch would need to evaluate the impact on AXP's market share and merchant discount revenue, which accounted for 57% of net operating revenue in 2014.
The ratings for AXP and its subsidiaries are equalized, which reflects Fitch's view that each subsidiary is core and integral to AXP's business strategy and operations. Fitch believes AXP would fully support each of these subsidiaries in the event of need.
The Support Ratings (SRs) of '5' reflect Fitch's view that external support cannot be relied upon. The Support Rating Floors (SRFs) of 'No Floor' reflect Fitch's view that there is no reasonable assumption that sovereign support will be forthcoming to AXP.
AXP's subordinated debt rating is one notch below the entity's Viability Rating (VR) of 'a+' in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile. The subordinated note rating includes one notch for loss severity given the subordination of these securities in the capital structure, and zero notches for non-performance given contractual limitations on interest payment deferrals and no mandatory trigger events which could adversely impact performance.
AXP's preferred stock ratings are five notches below the AXP's VR of 'a+' in accordance with Fitch's assessment of each instruments respective non-performance and relative loss severity risk profile. The preferred stock ratings include two notches for loss severity given these securities deep subordination in the capital structure, and three notches for non-performance given that the coupons of these securities are non-cumulative and fully discretionary.
AXP Centurion Bank's and AXP Bank, FSB's uninsured deposit ratings of 'AA-/F1+' are rated one notch higher than their respective IDR's because U.S. uninsured deposits benefit from depositor preference in the U.S. Fitch believes depositor preference in the U.S. gives deposit liabilities superior recovery prospects in the event of default.
RATING SENSITIVITIES - IDRs, Subordinated Debt, Preferred Shares, Support Ratings, Support Rating Floors, VRs, Deposits
Fitch believes positive rating momentum is relatively limited, given the AXP's strong ratings currently, concentrated exposure to consumers and focus on payment services. That said, longer-term positive rating momentum could potentially be driven by successful navigation of current regulatory, partnership and competitive/technological challenges, increased earnings diversification that results in less cyclical financial performance, and enhanced funding diversity/stability, particularly with respect to internet-based deposits.
Negative rating action could be driven by a material decline in AXP's franchise, which may be evidenced by discount rate erosion, declines in volumes or loss of market share, among other factors. Other negative drivers could include weakening earnings performance, resulting from a decrease in market share, sustained deterioration in credit performance, the loss of key partner relationships, increased merchant steering or an inability to contain costs, a weakening liquidity profile, significant reductions in capitalization, and/or potential new and more onerous rules and regulations. Negative rating momentum could also be driven by an inability of AXP to maintain its competitive position and earnings prospects in an increasingly digitized payment landscape.
AXP's Support Rating and Support Rating Floor are sensitive to Fitch's assumptions around capacity to procure extraordinary support in case of need.
The subordinated debt ratings are directly linked to AXP's VR and would move in tandem with any changes in AXP's credit profile.
The preferred stock ratings are directly linked to AXP's VR and would move in tandem with any changes in AXP's credit profile.
AXP Centurion Bank and AXP Bank, FSB's uninsured deposit ratings are rated one notch higher than each company's IDR, and therefore are sensitive to any changes in their respective IDR's. The deposit ratings are primarily sensitive to any change in AXP's long- and short-term IDRs.
Fitch has affirmed the following ratings:
American Express Company
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Senior debt at 'A+';
--6.80% Subordinated Debentures due September 2036 at 'BBB';
--3.625% Subordinated Notes due Dec 2024 at 'A';
--Preferred Shares, Series B at 'BBB-';
--Preferred Shares, Series C at 'BBB-';
--Viability Rating at 'a+';
--Support at '5';
--Support Floor at 'NF'.
American Express Credit Corp.
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Senior debt at 'A+'.
American Express Centurion Bank
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--Senior debt at 'A+';
--Long-term deposits at 'AA-'.
--Short-term deposits at 'F1+';
--Viability Rating at 'a+';
--Support at '5';
--Support Floor at 'NF'.
American Express Bank, FSB
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--Senior debt at 'A+';
--Long-term deposits at 'AA-'.
--Short-term deposits at 'F1+';
--Viability Rating at 'a+';
--Support at '5';
--Support Floor at 'NF'.
American Express Travel Related Services Company, Inc.
--Long-term IDR at 'A+';
--Short-term IDR at 'F1'.
American Express Canada Credit Corp.
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--Senior debt at 'A+'.
The Rating Outlook is Stable.
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